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US productivity ‘rebounds’ in 2nd qtr, wage inflation muted Wholesale inventories up 0.3 pct in June

WASHINGTON, Aug 8, (Agencies): US nonfarm productivity rebounded more strongly than expected in the second quarter, putting a lid on wage pressures and giving the Federal Reserve room to keep interest rates low for a while. The Labor Department said on Friday productivity increased at a 2.5 percent annual rate after contracting at a revised 4.5 percent pace in the first quarter, which was the fastest decline since the fourth quarter of 1981. Productivity, which measures hourly output per worker, was previously reported to have declined at a 3.2 percent rate in the first three months of the year.

Economists had forecast productivity rising at a 1.5 percent rate in the April-June period. The rebound in productivity follows a bounce back in gross domestic product in the second quarter. The economy grew at a 4.0 percent rate after shrinking at a 2.1 percent pace in the first quarter. A separate report from the Commerce Department showed a moderate gain in wholesale stocks in May and June, which could have an impact on the second-quarter GDP growth estimate, especially coming on the heels of a report this week showing a small rise in inventories of nondurable factory goods in June.

The government in its advance second-quarter GDP report last week estimated inventories contributed 1.66 percentage points to growth. The trend in productivity, however, remains sluggish. Compared to the second quarter of 2013, productivity increased 1.2 percent. Workers put in more hours in the second quarter, but with output rising, that lowered labor costs. Unit labor costs, the price of labor per single unit of output, rose at a 0.6 percent rate. They had advanced at a revised 11.8 percent rate in the first quarter, the quickest since the fourth quarter of 2012, as a harsh winter depressed output.
 
Policy 
The Fed is keeping an eye on wage growth as it ponders the future course of monetary policy. While the tame unit labor costs suggest the US central bank should be in no hurry to start raising its benchmark overnight interest rate, which it has kept near zero since December 2008, other measures such as income and the employment cost index point to some firming of wage pressures. In addition, there is growing anecdotal evidence that companies are raising wages. A compensation gauge produced by the National Federation for Independent Business is hovering at a seven-year high. Unit labor costs were previously reported to have increased at a 5.7 percent rate in the first quarter and economists had expected them to rise at a 1.4 percent pace in the second quarter. Compared to the second quarter of last year, unit labor costs rose 1.9 percent, showing that wage inflation remained benign. They had increased 2.6 percent in the first quarter.
 
Meanwhile, US wholesalers restocked their warehouses at a modest pace in June for a second straight month, a sign they may anticipate slower growth ahead. The Commerce Department said Friday that wholesale inventories rose 0.3 percent, the same as the previous month. May’s inventory gain was revised down from 0.5 percent. The slowdown in restocking likely reflects weaker wholesale sales. Sales grew just 0.2 percent in June, down from 0.7 percent in May. 
 
In June, companies boosted their stockpiles of furniture, lumber, computer equipment, and steel and other metals. But auto inventories fell, even as sales jumped. That suggests automakers will need to keep cranking out cars to meet strong demand. The report shows that inventory levels are roughly in line with sales. That means wholesalers likely haven’t gone too far in restocking their goods. As a result, they probably won’t have to slow restocking in the coming months.
 
Slower rebuilding of inventories can drag on growth. That’s because it means fewer orders for factory goods. That is what happened in the first three months of the year, when a big downshift in inventory building subtracted 1.2 percentage points from the economy’s growth. The economy contracted at a sharp 2.1 percent annual rate. Harsh winter weather and a big drop in exports also contributed to the decline. The slowdown was temporary, however. Inventory restocking contributed about 1.7 percentage points to growth in the second quarter, when the economy expanded at a 4 percent annual rate. The report Friday covers inventories held at the wholesale level. In a later report, the government will detail inventories at the manufacturing and retail levels.

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